Sunday, July 07, 2013

Is financial over-regulation increasing rents in the Bay area?

There's a large body of research that suggests high rents are often the result of restrictive zoning and even rent control - but one TechCrunch author argues that it's financial over-regulation that's caused rising rents:

When wealth is created but concentrated in certain ZIP codes, both local areas and the nation’s economy is affected. It all has a cascading effect. With more wealth locked into San Mateo and surrounding counties, the demand for assets rises quickly. House prices skyrocket. Individuals who don’t have enough cash reserved for a down-payment are forced to rent, where competition for rental property creates its own endless race. Contractors rush to meet housing demand, springing up buildings in a boom-time that create noise pollution and closed streets and blocked highway on-ramps, which combines with more and more warm bodies flocking to the Bay Area for the shot to work in the one sector that provides any hope for real, sustainable economic growth. This is why — in large part because of SOX — that your rent is high, why there’s so much traffic and construction, and why it won’t change anytime soon.

There are many, many reasons a great number of people would benefit if private companies operated in an environment where restrictions wouldn’t dissuade shareholders and investors from accessing public markets earlier. Entrepreneurs and investors would have an attractive exit option earlier in their life cycle; entrepreneurs wouldn’t have to rely on “build and shut down” acquisitions to get an exit; employees and insiders wouldn’t feel as much pressure to access liquidity through secondary offerings; wealth-creation would be more spread out and could generate even more jobs; and retail investors would have an equal chance to invest into the next Facebook when its valuation is, say, around a billion dollars versus when its $100B. For a bit of perspective, Google IPO’d after raising a relatively modest amount of venture capital, and Microsoft IPO’d at a $500M valuation — in these cases, the wealth created post-IPO was spread out and technically available to all who could invest in public markets.

Scott Kupor, a Managing Partner at Andreessen Horowitz, wrote a strong piece artfully detailing this view, suggesting over-regulation effectively blocks the entire middle class from participating in the massive wealth creation driven by technological advancement. Over the years, USV’s Fred Wilson has written many great posts on this topic, discussing the nuances of going public early, how public markets can have a harmful effect on company culture, and how potentially distortive the IPO process can be relative to true company value.

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